Analysts mixed after Dell says it will restate results

JohnLetzing

SAN FRANCISCO (MarketWatch) -- Dell Inc. shares got a slight lift Friday, one day after the world's No. 2 personal-computer company said it will restate more than four years of financial results after "errors and irregularities" were discovered during a review of past accounting and reporting practices.

Dell
DELL
shares added 39 cents to close at $26.32 following the company's late-Thursday admission that accounting irregularities included manipulation of numbers at the request of senior executives in order to artificially hit financial targets

However, the company may not be out of the woods in the eyes of the Securities and Exchange Commission. Dell warned that despite the conclusion of the company's internal review, "the SEC's investigation is ongoing, and there can be no assurance that there will not be additional issues or matters arising from that investigation."

The Round Rock, Texas-based PC maker said in a statement that its "audit committee has determined to restate the company's financial statements relating to fiscal 2003, 2004, 2005 and 2006 ... and the first quarter of fiscal 2007."

The financial impact of the restatement includes a decrease in earnings of between 2 and 7 cents a share for the restatement period, compared to previously reported earnings of $4.78 a share for the period, Dell said.

Net revenue is expected to be reduced by less than 1% for the period, and net income is expected to be reduced between $50 million and $150 million, the company said, from the more than $12 billion in net income previously reported for the period.

Eric Ross, an analyst with ThinkEquity Partners, called the restatement "meaningless," due to the amounts involved in the restatement periods.

"They represent a small amount compared to the billions in earnings that Dell has reported," Ross said, in a research note. "In our view, Dell has finally cleared things up."

Ross holds a buy rating and $35 price target on Dell's stock.

Dell said the previously disclosed, internal accounting review was started in 2006 in response to inquiries from the Securities and Exchange Commission. The review found that "account balances were reviewed, sometimes at the request or with the knowledge of senior executives, with the goal of seeking adjustments so that quarterly performance objectives could be met."

Dell chief financial officer Donald Carty said during a conference call with analysts that while most of the misconduct involved artificially shifting account balances, "we did find evidence of fraud and ... revenue that had been booked that had to be completely undone," involving an unspecified "transaction abroad," Carty said.

Carty did not directly answer questions about whether executives who had knowledge of the misconduct are still with the company. "We're not terribly proud that we found one element of our company that was clearly not world class," Carty said.

In response to the review's findings, Dell has taken a number of "remedial" actions, it said in the statement, including adjustments in supervision, reporting processes and personnel.

"We are committed to achieving and maintaining a strong control environment, high ethical standards and financial reporting integrity," Chief Executive Michael Dell said in the statement.

The investigation into Dell's past accounting practices came about during a time of turmoil and restructuring at the PC giant. In January, the company fired CEO Kevin Rollins after almost three years on the job, and replaced him with Dell founder, chairman and former CEO Michael Dell.

Not long after Dell reclaimed his CEO post, the company announced plans to restructure and cut 10% of its workforce, or about 8,000 jobs. Dell also broke with its long-time tradition of selling only built-to-order PCs by entering a retail deal to sell some of its computers at Wal-Mart Stores Inc.
WMT, -2.75%

While many analysts said the actual numbers involved in the Dell accounting probe weren't outlandish in the grand scope of Dell's earnings and revenue figures, some said the investigation, and the ongoing SEC review, do leave reasons for investors to be concerned about Dell's culpability in the matter.

Ben Reitzes, of UBS, said that the relative small amounts involved in the restatement "may be viewed positively," but that Dell might have bigger problems as the SEC probe continues.

"In our experience, drawn out SEC investigations have on occasion highlighted additional issues that resulted in management changes and or penalties," Reitzes said. "While seemingly cleared by his company's investigation, Michael Dell was CEO during periods with the largest restatements needed."

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